(Bloomberg) — Indonesia’s central bank left its benchmark interest rate unchanged for a fourth straight month and reiterated that it would be on an extended pause to support a still vulnerable currency.
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Bank Indonesia’s decision to keep the BI-Rate at 6% on Wednesday was predicted by all 30 economists surveyed by Bloomberg. Governor Perry Warjiyo and his board have left the rate steady since November as they approach monetary easing with caution, given implications for the rupiah.
The hold decision is in line with BI’s objective to ensure the rupiah’s stability and is a “preemptive and forward-looking measure to maintain inflation within the 1.5%-3.5% target corridor in 2024,” Warjiyo said after announcing the decision.
The central bank will maintain the BI-Rate for “a while” and will likely assess any room for a cut in the second half of this year, the governor said.
The rupiah extended its earlier gain against the US dollar to 0.2% at 15,635, as BI indicated it’s in no rush to cut rates. The benchmark stock index was down 0.79%.
What Bloomberg Economics Says…
A rate cut in Indonesia still appears to be some way off. The currency has fallen 1.7% against the dollar so far this year, so the central bank can’t let its guard down.
— Tamara Mast Henderson, economist
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Even though risks from election uncertainty have mostly passed, the monetary authority still needs to keep a watchful eye on the currency as any weakness could fan imported inflation. The rupiah has remained volatile as investors pulled back bets for an early Federal Reserve rate cut after strong US employment and inflation data this month.
With the Fed pivot unlikely until the second half of this year, rising US Treasury yields are putting pressure on emerging-market currencies, including Indonesia’s, Warjiyo told reporters. The rupiah should remain stable and appreciate further, supported by BI’s intervention in the spot, domestic non-deliverable forward and bond markets, as well as the continued sale of rupiah and dollar securities that can bring in inflows, he said.
The central bank is also watching for any disruptions in global supply chains that could further push up domestic food costs. Policymakers are coordinating with the government so that food prices won’t disrupt the direction of BI’s monetary policy, Warjiyo said. Headline inflation stood at 2.57% in January, well within Bank Indonesia’s 1.5%-3.5% target range for this year. The core gauge is at a two-year low of 1.68%.
Power Transition
It also remains to be seen how smooth the transition of power will be as President Joko Widodo’s term comes to an end in October. Official election results by next month will likely show incumbent Defense Minister Prabowo Subianto won the election, with Gibran Rakabuming Raka, Jokowi’s eldest son, as his running mate.
When asked about Prabowo’s campaign pledges, including a free lunch and milk program that Fitch Ratings warned could increase government spending and debt, Warjiyo said BI will remain independent in its decision-making.
The central bank has kept its macroprudential policy loose to help push lending and sustain economic growth, adding as much as 163 trillion rupiah in liquidity as of December. BI sees recovery intact as it retained its estimate for Indonesia’s gross domestic product growth at 4.7%-5.5% for 2024.
Credit grew at 11.83% in January, Warjiyo said, in what’s the fastest pace in over a year. Banks have started shifting their funds away from securities and toward lending to their sectors of expertise, he said.
–With assistance from Norman Harsono, Claire Jiao, Tomoko Sato and Matthew Burgess.
(Updates with more details from briefing.)
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